Sales

- Variable Expenses
Contribution Margin
- Fixed Expenses
Operating Income

Cost-Volume-Profit Analysis

Decision-Making

- high fixed costs income increases in good years; however, income also comparatively lower in bad
years as compared to low-fixed costs
- choose sales mix with highest CM in relation to constraining resource (maximize CM/unit of constrained
resource)

Markup=

selling pricevariable cost

variable cost

Contribution Margin Ratio=

Variable Expense Ratio=

Unit CM
Unit Sales Price

Variable Expenses
Selling Price

BreakEven /Target (Units ) =

BreakEven /Target ( $ )=

PreTax Profits=

Expenses +Target Profit

CM /unit

Expenses +Target Profit

CM Ratio

AfterTax Profit
1Tax Rate

Margin of Safety =Total SalesBreak Even Sales

Degreeof Operating Leverage=

CM
Net Op . Incom e

For multi-product break-even, distribute break-even in $ based on current sales distribution.

Discontinuation

Avoidable Fixed expenses = advertising and salaries of product line managers.

Non-avoidable = depreciation on equipment (sunk cost but still traceable), common allocated costs,
general administrative
If Lost CM > Avoidable Fixed Costs do not discontinue
Decisions
Adding/DroppingSegments

Make/Buy

C o n tr i b u ti o n M a r g i n
S o l u ti o n
C o n tr i b u ti o n m a r g i n l o s t i f d i g i ta l
w a tc h e s a r e d r o p p e d
L e s s f i x e d c o s ts th a t c a n b e a v o i d e d
S a l a r y o f th e l i n e m a n a g e r
A d v e r ti s i n g d i r e c t
R e n t f a c to r y s p a c e
N e t d i s a d v a n ta g e

ConstrainedResource
Cost
Per
U n it

$ (3 0 0 , 0 0 0 )

9 0,00 0
10 0,00 0
7 0,00 0
$

C o m p a r a ti v e In c o m e A p p r o a c h
S o l u tio n
Keep
D ro p
D i g i ta l
D i g i ta l
W a tc h e s
W a tc h e s
S a le s
$ 500,000
$
L e s s v a ria b le e x p e n s e s :
M a n u fa c tu r i n g e x p e n s e s
120,000
S h ip p in g
5 ,0 0 0
C o m m is s io n s
7 5 ,0 0 0
T o ta l v a r i a b l e e x p e n s e s
200,000
C o n tr i b u ti o n m a r g i n
300,000
L e s s fi x e d e x p e n s e s :
G e n e r a l fa c to r y o v e r h e a d
6 0 ,0 0 0
6 0 ,0 0 0
S a la ry o f lin e m a n a g e r
9 0 ,0 0 0
D e p r e c i a ti o n
5 0 ,0 0 0
5 0 ,0 0 0
A d v e r ti s i n g d i r e c t
100,000
R e n t fa c to r y s p a c e
7 0 ,0 0 0
G e n e ra l a d m in . e x p e n se s
3 0 ,0 0 0
3 0 ,0 0 0
T o ta l fi x e d e x p e n s e s
400,000
140,0 00
N e t o p e r a ti n g l o s s
$ (1 0 0 , 0 0 0 )
$ (1 4 0 ,0 0 0 )

260,000
(4 0 , 0 0 0 )

O u ts i d e p u r c h a s e p r i c e

$ 25

D i r e c t m a te r i a l s
D ire c t la b o u r
V a ria b le o v e rh e a d
D e p r e c i a ti o n o f e q u i p .
S u p e r v i s o r 's s a l a r y
G e n e r a l fa c to r y o v e r h e a d
T o ta l c o s t

9
5
1
3
2
10
30

P ro d u c t

C o s t o f 2 0 , 0 0 0 U n i ts
Buy
M a ke
$ 5 0 0 ,0 0 0
1 8 0 ,0 0 0
1 0 0 ,0 0 0
2 0 ,0 0 0
4 0 ,0 0 0
$ 3 4 0 ,0 0 0

S e llin g p ric e p e r u n it
L e s s v a ria b le e x p e n s e s p e r u n it
C o n tr i b u ti o n m a r g i n p e r u n i t

C u r r e n t d e m a n d p e r w e e k (u n i ts )
C o n tr i b u ti o n m a r g i n r a ti o
P r o c e s s i n g ti m e r e q u i r e d
o n m a c h in e A 1 p e r u n it

$ 5 0 0 ,0 0 0

60
36
$
24
2 ,0 0 0
40%

120,000
5 ,0 0 0
75,0 00
200,000
(3 0 0 , 0 0 0 )

$ 3 0 ,0 0 0
2 4 ,0 0 0
$ 6 ,0 0 0

Sell ProcessFurther
Per Log
Lum ber

S aw dust

270
140
130
50
80

50
40
10
20
(1 0 )

C o n tr i b u ti o n m a r g i n p e r u n i t
T i m e r e q u i r e d to p r o d u c e o n e u n i t
C o n tr i b u ti o n m a r g i n p e r m i n u te

S
V
C
B
C

e llin g p r ic e
a r ia b le c o s t
o n t r ib u tio n m a r g in
o a rd fe e t
M p e r b o a rd fo o t

P
B
B
B
P

ro d u
o a rd
o a rd
o a rd
ro d u

c tio n
fe e t
fe e t
fe e t
c tio n

o f c h a ir s
r e q u ir e d
r e m a in in g
p e r ta b le
o f t a b le s

C h a ir s
$
80
30
$
50
2
$
25

24
1 .0 0 m in .
$
24

T a b le s
$ 400
200
$ 200
10
$ 20

600
1 ,2 0 0
800
10
80

Flex Budgeting : Determine rate and multiply across flexible budgets, compare the two determine variances

Reporting For Control

Traceable costs vs. common costs
Segment Margin = CM Traceable Fixed Costs
Common costs should not be allocated to segments

ROI=

Operating Income
Income
=Margin Turnover=
Average Operating Assets
Investment

Margin=

Operating Income
Sales

Turnover=

0 .5 0 m in .

P ro d u c t

I n c r e a s e i n r e v e n u e (3 , 0 0 0 $ 1 0 )
I n c r e a s e i n c o s ts (3 , 0 0 0 $ 8 v a r i a b l e c o s t)
I n c r e a s e i n n e t o p e r a ti n g i n c o m e

S a l e s v a l u e a f te r f u r th e r p r o c e s s i n g
S a l e s v a l u e a t th e s p l i t- o f f p o i n t
I n c r e m e n ta l r e v e n u e
C o s t o f f u r th e r p r o c e s s i n g
P r o f i t (l o s s ) f r o m f u r th e r p r o c e s s i n g

50
35
$
15
2 ,2 0 0
30%

A n a l y s i s o f S e l l o r P r o c e s s F u r th e r

90,0 00
100,000
70,0 00
260,000
$ (4 0 , 0 0 0 )

1 .0 0 m in .

Special Orders
D i ffe r e n c e
$ (5 0 0 , 0 0 0 )

Sales
Average Operating Assets

Residual Income=Divisional Net income( erest Charged Invested Capital )

Residual Icome=Operating Income( Average Op. Assets Min. Required Rate of Return)

$
$

15
0 .5 0 m in .
30

Variance
OverheadVariances
Material Variances
VariableM.O. Variances
Material Price Variance =AQ (AP-SP)
Variable M.O. SpendingVariance=AH(AR-SR)
Material QuantityVariance=SP (AQ-SQ)
Variable M.O. EfficiencyVariance=SR(AH- SH)
The price varianceiscomputed on the entire quantitypurchased . FixedOverheadVariances
The quantityvariance iscomputed onlyon thequantityused.
Budget Variance =Actual Fixed Overhead Incurred - Fixed Overhead Budget
LaborVariances
VolumeVariance=Fixed Overhead Budget - Fixed Overhead Applied
Labor RateVariance =AH(AR- SR)
Fixed Overhead Budget =DHXFR(DH: Denominator Hours; FR- Std Fixed Overhead Rate)
Labor EfficiencyVariance=SR(AH- SH)
Fixed Overhead Applied =SRXFR(SR- Standard Hoursallowed; FR- asabove)

1.SalesBudget
Budgeted Sales in Units
SalesPricePer Unit
Total BudgetedSales

6.DirectLabourBudget
Production (FromProduction Budget)
Labor Hour per unit
LaborHourRequired
Guaranteed Labor Hours
LaborHoursPaid
HourlyRate
DirectLaborCosts

x
y
xy

2.AccountsReceivables(CashCollection)
AccountsReceivable(31/3)
April Sales(FromSalesBudget)
x%of ___
y%of ____
MaySales(FromSalesBudget)
x%of ___
y%of ____
Total CashCollection
3.ProductionBudget
Budgeted Sales (FromSalesBudget)
Add: Desired EndingInventory
Total Needs
Less: BeginningInventory
RequiredProduction

April
10,000

May

x
y
xy

7.ManufacturingOverheadBudget
Labor Hour Required (Direct Labor Budget) x
VariableM.O. Rate
y
VariableM.O. Costs
xy
Fixed M.O. Costs
Total M.O. Costs
Less: Non Cash Exp (Depreciation)
CashDisimbursementForMO

10. CashBudget
BeginningCash Blance
Add: Cash Collections
Total CashAvailable
Less: Cash Disimbursements
Direct Material (DM Budget)
Direct Labor (Dl Budget)
Manuf. OH(MOHBudget)
S&A
Dividends
Total disbursements
Excess/Deficiency
Financing
Borrowing
Repayments
Interest
Total Financing
EndingCashBalance

8.EndingFinshedGoodsInventoryBudget
10,000 ProductionCostsPerUnit
Qty Cost Total
Direct Material (DM Budget)
2 10 20
Direct Labor (Dl Budget)
4.DirectMaterialsBudget
ManufacturingOverhead(MOBudget)
(Rate - Total MOFor Quarter/Total Labor Hours req)
Production(FromProductionBudget)
x
Total Costsper unit
p
Material Per Unit
y
BudgetedFinishedGoodsInventory
ProductionNeeds
xy
EndingInventoryIn Units(FromProduction Budget)
Add: Desired EndingInventory
20000
Unit Product Costs
p
Total Needs
EndingFinishedGoodInventory
Less: BeginningInventory
20000
Materialstobepurchased
9.Selling&AdminBudget
Budgeted Sales(FromSalesBudget)
5.AccountsPayable(CashDisimbursements)
VariableS&ARate
y
AccountsPayable(31/3)
VariableS&A Costs
xy
April Purchases(FromDM Budget)
Fixed S&A. Costs
x%of ___
Total S&ACosts
y%of ____
Less: Non Cash Exp (Depreciation)
MayPurchases(FromDM Budget)
CashDisimbursementForS&A
x%of ___
y%of ____
Total CashPayments

R oyal C om pany
B u d g e te d In c o m e S ta te m e n t
F o r th e T h r e e M o n th s E n d e d J u n e 3 0
S a l e s (1 0 0 ,0 0 0 u n i ts @ $ 1 0 )
C o s t o f g o o d s s o l d (1 0 0 ,0 0 0 @ $ 4 .9 9 )
G ro ss m a rg in
S e l l i n g a n d a d m i n is tr a tiv e e x p e n s e s
O p e r a tin g i n c o m e
In te r e s t e x p e n s e
N e t in c o m e

$ 1 ,0 0 0 , 0 0 0
49 9 ,0 00
50 1 ,0 00
26 0 ,0 00
24 1 ,0 00
2 ,0 0 0
$ 23 9 ,0 00

R o yal C om pany
B u d g e te d B a l a n c e S h e e t
J u n e 30
C u r r e n t a s s e ts
C a sh
A c c o u n ts r e c e iv a b l e
R a w m a te r i a l s i n v e n to r y
F in i s h e d g o o d s i n v e n to r y
T o ta l c u r r e n t a s s e ts
P r o p e r ty a n d e q u i p m e n t
Land
E q u ip m e n t
T o ta l p r o p e r ty a n d e q u i p m e n t
T o ta l a s s e ts
A c c o u n ts p a y a b l e
C o m m o n sh a re s
R e ta i n e d e a r n i n g s
T o ta l l i a b i l i ti e s a n d e q u i ti e s

4 3 ,0 0 0
7 5 ,0 0 0
4 ,6 0 0
2 4 ,9 5 0
1 4 7 ,5 5 0

5 0 ,0 0 0
3 6 7 ,0 0 0
4 1 7 ,0 0 0
$ 5 6 4 ,5 5 0
$

2 8 ,4 0 0
2 0 0 ,0 0 0
3 3 6 ,1 5 0
$ 5 6 4 ,5 5 0